International Business Operations and the Impact of Political Environment

Abstract

This study attempts to develop a conceptual frame work to deal with operations and management in a foreign business environment. The study develops a measure for business financial performance by employing factor analysis methods to integrate three profit-related ratios, derived from Modified DuPont Model, utilizing financial performance data from 630 multinational companies ranked in Business Week's Global 1000 report between years 1994-1997.

In the analysis of multinational companies cases, approximately 400 sets of financial data (Return/Assets, Return/Revenues, Return/Equity), were categorized and computed for intercorrelations and development of the financial performance index. A new financial performance measure was derived and termed the Financial Performance Index or FPI. Indices trends for 4 years were generated and compared among four parent countries (France, Germany, Japan, and U.S.), across four selected industry groups, i.e., automobile, pharmaceuticals, electric and electronic equipments and banking. In the analysis of the multinational companies data, the financial performance index exhibited patterns and trends which varied by country and across industry groups; moreover, they added analytical depth when interpreted along with market shares and sales mode.

To test the hypothesis that a multinational company's financial performance in foreign business environment is linearly related to the host country's political conditions. Twelve political uncertainties indicators (independent variable) in thirteen host countries were chosen to test for linear relationship with the level of financial performance index (dependent variables).

Five equations were formulated to predict the Financial Performance Indices of the four selected industries and the country composite. A step-wise method of multiple regression analysis was employed to measure and determine a predication equation with most favorable financial performance in thirteen host countries of four major industries, i.e., automobile, pharmaceuticals, electric and electronic equipments, and banking. The combination of political risk indicators in the host country can explain the variations of the country composite FPI and the FPI across four selected industries.

Results of multiple regression analysis support the hypothesis, enabling prediction of the FPI as well as analysis of the differential importance of the political risk indicators. A model of international business operations was fully developed to be applied as a conceptual framework for further research and practical applications in the field of international business operations.